Mixed Cost Trends

Robert S. Reichard, Economics Editor

T here's both bad news and good news on the textile and apparel cost front. On the negative
side, it's the disturbing increase in cotton fiber tags. On a more reassuring note, however, labor
costs are flat, and perhaps even a bit lower than they were a year ago. Looking at cotton first:
Prices of the natural fiber have moved up substantially over the past year. Blame it all on
relatively sharp production declines both here and abroad. Global output this year, for example, is
expected to be down more than 20 million bales vis-à-vis the peaks of a few years back. To be sure,
some modest output increases are anticipated for next year. But they won't be nearly enough to
redress the current supply-demand imbalance as consumption continues to outpace new production.
Result: a continuing decline both in world stocks and the world stock/use ratio. The latter -- a
closely watched market indicator -- is expected to drop down to 42.1 percent by the end of next
year. That would be the lowest such ratio in more than 15 years, and significantly under the
57.5-percent and 45.5-percent readings of the past two years. Given such numbers, it would be quite
unrealistic to expect any near-term price relief. Best bet: cotton quotes remaining well above the
lows of last spring, through year-end and probably well into 2011. On a somewhat rosier note,
however, man-made fiber prices have been fairly flat, at least on an overall basis. But here, too,
some modest advances may soon be in the offing as higher energy tabs push up the cost of these
fibers' key input -- petrochemical feedstocks.

No Labor Cost Pressure

On the other hand, textiles' other major cost drain -- wages -- continues to present few, if
any, problems. Over the past 12 months, for example, average hourly mill wages have gone up by only
about 3.5 percent. And even this small number overstates real labor pressure. That's because these
reported hourly pay hikes continue to be offset, or even more than offset, by continuing
productivity gains. This increased worker efficiency can best be estimated by comparing the change
in the number of workers over the past year with change in mill output over the same 12-month
period. And the results are quite reassuring -- with the industry managing to turn out more mill
products with fewer workers. Do the actual math, and the industry's estimated productivity gain
over the past year comes to near 4 percent. Adjust the small hourly pay increase noted above for
this productivity increase, and the results suggest that labor costs per unit of output have held
steady or may even have dropped a bit over the past year. Add in the fact that labor accounts for
almost 20 percent of an American mill's sales dollar -- and it implies that aggregate industry
costs -- combined labor, material and overhead -- may not have moved up all that much over the past
year or so. Moreover, the extent that costs may have moved up could well be offset by somewhat
higher price levels. In any event, how all the above impacts bottom-line performance should become
clearer next month when new earnings data become available.

More Thoughts On China

Elsewhere, it's becoming increasingly clear that any relief from a rising yuan won't really
make all that much of a difference in slowing down U.S. totals of Chinese textile and apparel
imports, which at last report were running better than 20 percent above year-earlier levels. Behind
cautious assessment: Any new upward revaluation from now through year-end should be quite modest --
certainly nowhere near the 21-percent jump in the yuan's value that took place during the 2005-2008
period; and increasing evidence suggests that an exchange rate shift would impact only part of an
imported product's cost structure. One American clothing executive, for example, figures that much
of a Chinese mill's expense goes for cotton, which is priced in dollars -- and therefore not likely
to be affected by revaluation. Nor would an exchange rate move make for any significant change in
targeted profit levels. Conclusion: Any revaluation-induced price increase in U.S. textile and
apparel imports from China would be considerably less than any actual increase in the value of the
Chinese yuan. Indeed, based on calculations by the above-noted clothing firm, a 5-percent upward
yuan evaluation by year-end would raise the cost of a $10 pair of boy's summer shorts by only 25
cents -- the equivalent of a paltry 2.5-percent increase. That's hardly enough to make for any
meaningful change in current import flows. Bottom line: Another hefty increase in textile and
apparel imports from China this year seems pretty much inevitable.